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On 20 December 2023, the Luxembourg Parliament passed bill of law 8292_ (Bill) implementing Council Directive (EU) 2022/2523_ of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (Pillar 2 Directive).
The new rules aim to tax the profits of large multinational and domestic groups with a combined annual turnover of at least EUR 750 million based on consolidated financial statements at a minimum rate of 15%.
Following an opinion issued by the Conseil d’Etat (State Council), which raised two formal objections more in the nature of clerical errors than substantive issues, the relevant provisions of the Bill were accordingly (slightly) amended.
In general, they are largely in line with the provisions of the Pillar 2 Directive. In addition, the Luxembourg government’s intention to follow the solutions identified at OECD level in relation to the OECD model rules and related commentaries in the application and interpretation of the Luxembourg Pillar 2 rules has been clearly reconfirmed. The amendments to the Bill issued in November 2023 also incorporated a number of clarifications and additional technical provisions drawn from the OECD GloBE administrative guidance of February and July 2023_ into the Bill. This particularly demonstrates the importance of seeing the domestic minimum top-up tax (DMTT) qualify for QDMTT safe harbour requirements.
During the debates in the parliamentary Finance Committee, it was noted that insofar as new administrative instructions are agreed at OECD level, the new provisions are likely to be subject to further amendments in the future. In addition, the Committee encouraged the government to analyse and propose adjustments to the investment tax credit regime (which has recently been modified_), to ensure that the regime continues to produce its full effect while remaining aligned with the Pillar 2 rules.
The new provisions will apply to tax years starting on or after 31 December 2023. The provisions on UTPR will generally apply to tax years starting on or after 31 December 2024 (unless the ultimate parent entity is located in a jurisdiction that has opted for deferred application of the IIR and UTPR rules, i.e. Estonia, Latvia, Lithuania, Malta or Slovakia_).
As the proposed rules (including a QDMTT) will apply to tax years starting on or after 31 December 2023, taxpayers are advised to assess promptly whether they fall within the scope of the proposed rules and/or whether there will be any practical impact on their operations. Given the wide scope of the Pillar 2 rules, it is not only traditional MNEs that may be impacted. Investment fund structures may also be affected and GPs and LPs may want to review their structures in light of these developments.
The application of any safe harbour or transition rule will need to be monitored and further developments, i.a. concerning existing and additional future OECD administrative guidance as well as supplemental domestic measures, are anticipated in 2024.